Bilateral ODA to LDCs

Page under revision, May-June 2024

Official development assistance (ODA) represents an important—in some cases critical—component of external financing in LDCs.*  Bilateral development assistance programs are determined by a number of factors, including the recipient country’s needs, donor policies and priorities, availability of funds, and regional and historical ties. Many donors define priority coutnries or areas, and LDCs often feature among them.  For example, in 2021, France enacted new legislation on programming of development cooperation which stipulates that it will focus its bilateral development assistance, and particularly grants, on LDCs, and especially those in sub-Saharan Africa.

Over time, donor countries have made commitments on the volume and modalities of ODA to LDCs:

• How much ODA: the 2030 Agenda for Sustainable Development, the Addis Ababa Action Agenda of the Third International Conference on Financing for Development and the Programme of Action for the Least Developed Countries for the Decade 2011-2020 all reiterate long-standing commitments by developed countries to provide the equivalent of 0.15 to 0.20 per cent of their gross national income (GNI) in the form of ODA to LDCs. This is in parallel to a commitment to provide the equivalent of 0.7 per cent of GNI in ODA to developing countries. In 2019, 5 of the 29 countries in the OECD's Development Assistance Committee (DAC) fulfilled the commitment of providing the equivalent of 0.15 per cent to 0.20 per cent of GNI as ODA to LDCs. Overall, ODA flows from DAC countries to LDCs were equivalent to 0.09 per cent of GNI of the group of donors, while flows to developing countries were equivalent to 0.32 per cent. Between 14 and 45 per cent of DAC countries’ total ODA went to LDCs (OECD, “Statistics on resource flows to developing countries”).

• Modalities of bilateral ODA - grant element: the OECD’s DAC recommends that the average grant element in ODA to LDCs should be either 90 per cent of a given donor's annual commitment to all LDCs, or at least 86 per cent of the donor's commitments to each individual LDC over a period of three years.  Most ODA to LDCs by DAC members is, in fact, in the form of grants. Since 2019, the LDC status of the recipient affects the extent to which concessional loans are counted as ODA by the OECD. In the grant-equivalent approach adopted by DAC members to measure ODA, grants and the grant portion of concessional loans count as ODA. Loans to LDCs and other low-income countries require a higher grant-equivalent component to be considered ODA, and differentiated discount rates are applied. 

• Untied aid. DAC members have also undertaken commitments to ensure aid to LDCs is "untied", that is, not conditional on the procurement of goods and services from the donor. In 2001, they adopted the Recommendation on Untying Official Development Assistance to the Least Developed Countries.  The recommendation covers most forms of ODA, but excludes free-standing technical cooperation, and it was left up to members as to whether they could untie food aid. A few members persistently fall short of their untying commitments. The Recommendation now also applies to non-LDCs that are among the heavily indebted poor countries, other low-income countries and/or International Development Association (IDA)-only countries and territories.

Some donors have established specific terms and conditions for LDCs:

• Germany provides grants to LDCs and to regional associations of developing countries whose members are mostly LDCs . For other developing countries assistance is mostly in the form of soft loans (financing terms for non-LDCs are in line with those applied by the World Bank), though grants are available in some areas such as poverty reduction and environmental protection. For details, see the Guidelines for bilateral Financial and Technical Cooperation of the Federal Ministry of Economic Cooperation and Development.
• France aims to concentrate its grants in 19 LDCs located mostly in Sub-Saharan Africa. 
• Japan gives low-income LDCs access to the most favourable terms under Japanese ODA loans, while non-LDC low-income countries and LDCs that are not low-income have access to a second category of preferential loans. See Terms and Conditions of ODA Loans | Our Work | JICA (April 2022).
• The Republic of Korea gives LDCs the most favourable terms among five categories of beneficiaries under the Economic Development Cooperation Fund (the other four are based on GNI per capita)

What happens when countries graduate?

Graduated countries no longer benefit from the LDC-specific terms for new loans from Japan and the Republic of Korea. They are normally still eligible for loans on concessional terms.

As for bilateral cooperation programmes more broadly, because belonging or not to the LDC category is not, by itself, the main criterion for the allocation of most development assistance, changes caused specifically by LDC graduation are typically limited within the overall development assistance programmes.  Even so, they require attention in the country's smooth transition strategy, and engagement with development partners, particularly those that do prioritize LDCs or limit grants to LDCs, is essential.  Often, as countries approach LDC graduation, they are also approaching other thresholds that might lead to changes in the amount or type of assistance received.  These "simultaneous graduations" should be clearly mapped out and addressed.

*The definition of ODA used by the OECD's DAC is “government aid designed to promote the economic development and welfare of developing countries”.  ODA includes grants, "soft" loans and the provision of technical assistance, and can be provided bilaterally, from donor to recipient, or channeled through multilateral organizations such as the United Nations or the World Bank. All developing countries, until they exceed the high-income threshold determined by the World Bank for three consecutive years, are eligible for ODA. Starting in 2019, the LDC status of the recipient affects the extent to which concessional loans are counted as ODA by the OECD. In the grant-equivalent approach adopted by DAC members to measure ODA, grants and the grant portion of concessional loans count as ODA. Loans to LDCs and other low-income countries require a higher grant equivalent component to be considered as ODA (at least 45 per cent for LDCs, compared to 10-15 per cent for other ODA-eligible developing countries). Moreover, in order to determine the grant element, DAC uses differentiated discount rates—6 per cent for upper-middle-income countries (UMICs), 7 per cent for lower-middle-income countries (LMICs) and 9 per cent for low-income countries (LICs) and LDCs. Differentiating the discount rate implies that loans to LDCs or other low-income countries are recorded as a higher level of ODA than a loan extended under the same conditions to other country groups, which could provide an incentive for donors to allocate ODA to LDCs. DAC also applies the grant-equivalent method to other non-grant instruments, such as equities and guarantees.